China Credit Squeeze Further Weakens “Real Demand”

DESPITE the 26% increase in China’s polyethylene (PE) imports in Q1 of this year over the same period in 2013, “real demand” continues to weaken – i.e. the resin bought by end-users to actually make things.

For example, even though the latest agricultural film-buying season is taking place, the pick-up in demand is less than had been anticipated. The season runs from April until July.

We think the consensus has firmly shifted. Most people now recognise that there is going to be no let-up in economic reforms and so growth will further decelerate during the rest of this year. Longer-term opportunities are fantastic, as we discussed in our April Webinar on China. But we face a very difficult, and uncertain, transition period.

Last week there was an apparent reason for cheer, though. It was announced that China’s overall exports rose by 0.9% in April from a year earlier, after falling for two straight months. Shipments had dropped 6.6% in March and 18.1% in February. Imports grew 0.8% from a year ago, reversing the 11.3% decline in March.

Export growth was largely driven by demand from developed economies. Shipments to the US jumped 12% year-on-year. That was a sharp increase from a rise of 1.2% in March and a drop of 11.3% in February.

Shipments to the European Union surged 15.1% last month, compared with 8.8% growth in March and a 14.4% drop in February.

“The external demand side is not such a big problem for China now, because the genuine recovery is there,” said Wei Yao, China economist at Societe Generale in Hong Kong.

“This is actually offering some support to China’s growth,” she added.

This is one interpretation. Here is another:

The 2.9% fall in the value of the Yuan so far this year is not just about getting rid of the speculators. It also about boosting exports as a means of protecting jobs through exports as the local economy continues to decelerate. China’s leaders will be judged on job protection and creation.

China will, as a result, end up exporting deflation to the rest of the world.

China’s “peak manufacturing season”, from July to September, is approaching. This is when the country’s finished-goods manufacturers ramp-up production in order to export to the West in time for Christmas. Thus, if exports continue to improve, we can expect a significant improvement in PE sales volumes when the season begins.

But better volumes would hardly be good news if China does, indeed, add to global deflationary pressures.